Monday, August 8, 2016

Aggregate Demand - Some Monetary vs Real Economy Factors

The real economy creates product, while central bankers are responsible for supplying the money that represents said product. It's what aggregate demand is all about. Yet even a basic economic construct such as this can become garbled, when policy makers and supply side factions end up obstructing what should be a straightforward process regarding GDP output.

In spite of occasional appearances to the contrary, accurate monetary representation for aggregate demand is the primary responsibility of central bankers. Their monetary policy role is all the more important, given the fact no other institution is equipped to remedy the problems central bankers can generate - problems which often continue to ripple across the entire economic spectrum.

For instance: aggregate demand as monetarily representative of final goods and services, is not to be confused with changes in specific income sources. Nevertheless, Hillary Clinton and others have reasoned that that wage gains for certain workers, could substitute for the wage gains that would otherwise result from greater labor force participation and output. And from Scott Sumner's response:

This is voodoo economics on steroids. Most economics textbooks are written by left-of-center economists, and I don't recall this sort of argument in any of them. For good reason.

Even if wage growth led to more demand (it doesn't) the Fed would simply raise interest rates enough to prevent demand from rising. I was especially disappointed to see some famous economists endorse her message.

Of course, something similar to this reasoning only exacerbated unemployment, during the Great Depression. John Cochrane also was not happy, about what he calls the federalization of labor.

We are getting a good hint that a centerpiece of economic policy in the Hillary Clinton administration will be an increase in Federal control over labor markets.

All of which reminded Arnold Kling of the earlier "cutting taxes will reduce budget deficit" rationale, hence his retort:

So where we once had supply-side voodoo economics, we now have demand-side voodoo economics. Just what we needed.

Why has so much lousy reasoning surfaced, instead of concerted efforts to regenerate long term growth potential? Regular readers aren't surprised that I blame some of this unfortunate dilemma on supply side intransigence, which has gone on long enough to finally cause real problems for the Republican party. There's too much willingness on the part of special interests all around, to leave blame, inaction and economic gridlock at government's door.

Yet this unwillingness to generate a broader and more inclusive marketplace, only means further problems, as policy makers continue to make completely unrealistic promises to constituents. Why, instead, don't governments give their citizens more means to assist one another on economic terms? Little did I know, in one of those overexcited early posts, how many obstacles stood in the way of "creating our own demand". Indeed, an article from Peter Thiel serves as a reminder, how "old school" I must be, with my (apparently) irrational hope for the future:

Technology means doing more with less. In the absence of technological progress, we end up with a zero-sum world, in which there must be a loser for every winner. It is not clear whether a capitalistic economic system could function without growth; and it is unlikely that a representative democracy, which requires the give-and-take of win-win compromise, would continue to function.

Instead of learning to do "more with less", special interests sometimes prefer to hold already existing incomes hostage, to rigid sets of standard of living expectations. For building construction, product "choices" mean "more with more" building requirements, which mostly view technological innovation as an intrusion on "the way we've always done it" non tradable sector activity. Hence the challenge for production reform in building and construction, is getting innovation to do more with less where doing so isn't a threat to the status quo.

That said, how would "more with less" - in terms of production reform potential, be possible via time based services product - which requires more time input, instead of less? Indeed, "more with less" in this regard requires thinking a bit differently. A common time template (game board) would make it possible to capture personal and group time investment commitments on incremental terms. By generating incremental gain (compensation) for in process personal time investment, fewer knowledge and skill based commitments would be lost from the marketplace, as individuals and groups work together to generate new time based services product.

Symmetric coordination means a restoration of maintenance functions for knowledge use, which have become increasingly threatened by limits to asymmetric compensation. A coordinated base for ongoing knowledge and skill based activity, provides more productive output in terms of both personal value, and the contributions of a given participating group, over time.

By using human capital investment as a stepping stone through the course of a lifetime, it becomes possible to smooth consumption between generations, particular for the product which is most in demand for the 21st century: knowledge use. Potential for aggregate demand growth need not be a mystery, so long as individuals can participate in the forms of aggregate supply which matter the most, on real economy terms.